Over the last ten years firms operating in wholesale financial markets have had to drastically increase the amount of their non-financial regulatory reporting with the introduction of EMIR and MiFID II/MiFIR. Firms trading in the US have also had to implement similar regulations. Regulators have introduced these requirements with the aim of gaining more transparency on risk within markets, identifying market abuse and increasing trade transparency to aid market efficiency.
In Europe, since 2019, regulatory reporting requirements have been under a period of review with the EMIR REFIT, EU MiFIR review and the UK Wholesale Markets Review.
Some of the amendments resulting from these reviews have now been finalised and firms need to be ready to report using the new requirements in line with various deadlines across 2024.
This is the first of a series of articles looking at the changes that firms need to implement.
Changes to MiFIR/MiFID II transparency requirements
In the EU, the review of MiFIR/MiFID transparency requirements was started by ESMA in 2019. Changes to the requirements contained in legislation (level 1) will not be finalised until the MiFIR Review has been agreed at the end of the trilogues (political) processes. However, the amendments to requirements set out in the delegated regulations or RTS 1 & RTS 2 have been published into the EU Official Journal and firms will need to start implementing ready for go-live in January 2024.
In the UK, the FCA has released Policy Statement 23/4 on improving equity secondary markets — which it consulted upon in July 2022 (CP 22/12). It takes forward some of the changes that were originally proposed as part of HM Treasury's "Wholesale Market Review" (WMR) with the aim of tailoring the onshored MiFID II/MiFIR regime for the UK market.
Equity markets transparency
In the EU, changes to RTS 1 include
- Applying from 1 January 2024:
- Measures to the reduce the non-price forming trade exemptions (to reporting) in RTS1 to be in line with RTS 22 (reporting of transactions to competent authorities)
- Further specification on the content of the data requests, and in particular the details to be disclosed by trading venues, APAs and consolidated tape providers when they report reference data and quantitative data to ESMA and competent authorities
- Increasing the pre-trade large-in-scale (LIS) thresholds for ETFs from EUR 1,000,000 to EUR 3,000,000
- Increasing the minimum qualifying size threshold for deferred publications of ETFs
- The introduction of a definition of a hybrid trading system to ensure they are captured under pre-trade transparency requirements
- Bringing forward the deferral publication time from noon to 9am of the next trading day
In the UK, changes include:
- On pre-trade transparency:
- Waivers — allowing UK trading venues to use reference prices from overseas venues, where those prices are robust, reliable and transparent — this will take effect immediately
- The FCA will undertake a broader view of the most relevant market in terms of liquidity (MRMTL) calculation once it receives its new powers to operate the pre-trade transparency regime via the Financial Services and Markets Bill
- The FCA will also remove size thresholds for orders benefiting from the order management facility (OMF) waiver by allowing trading venues to calibrate them according to the characteristics of their markets — this will take effect immediately
- On post-trade transparency from 29 April 2024
- Non-price forming trades — modifying and expanding the list of exceptions from post-trade transparency — e.g. inter-fund transfers, expanding the exemption of give-up/give-in transactions, inter-affiliate trades, transactions arising in the context of margin or collateral requirements for the purposes of clearing
- Improving the consolidation of trade reports from different source by deleting some flags and introducing some new flags, for example:
- Deleting SI-related flags “SIZE”, “ILQD” and “RPRI”
- Deleting the agency cross flag “ACTX”, the duplicate trade flag “DUPL”
- Aggregating the flags applicable to different types of negotiated trades “NLIQ”, “OILQ” and “PRIC” into single flag “NETW”
- The FCA is considering policy options to maintain alignment between trade and transaction reporting
- Changes to formatting conventions of the “Price” and “Price currency” reporting fields and introduction of a new field — `Price conditions'.
Non equity markets transparency
In the EU changes to RTS 2, that will apply from 1 January 2024, include:
- Measures to align the reporting of non-price forming transactions between RTS2 and RTS22 (reporting of transactions to competent authorities)
- The introduction of a definition of a hybrid trading system to ensure they are captured under pre-trade transparency requirements
- Bringing into line with market conventions the reporting of bond and CDS prices
- Adding a flag to identify portfolio trades
- Further clarification and specification on the post-trade transparency data field and flag requirements
- Specifying the format under which certain characteristics of commodity and freight derivatives are reported
In the UK, the FCA is still considering the exact changes to non-equity markets transparency with a consultation paper expected at the end of 2024. Market feedback is that the current transparency regime for fixed income and derivatives markets, which is modelled on the one for equities markets, does not work, so changes proposed could be quite radical.
Designated Reporting
In response to the WMR, there were calls to separate the ability to do post-trade reporting of OTC trades on behalf of clients from the other obligations of being a Systematic Internaliser (SI). Market participants also raised concerns that there is a degree of uncertainty about who should report OTC trades and that the current reporting regime creates operational complexity for firms.
The FCA is adopting a new designated reporting (DR) firms regime where firms will be able to register as designated reporters regardless of whether they are an SI in any instrument. Registration will apply at entity level — but DRs will be able to bilaterally agree for the other party to report the trade if a DR doesn't have the arrangements set up to report a particular type of asset or instrument.
The FCA will announce further details on the registration procedure in due course. The concept of a designated reporting entity has also been introduced in the EU as part of the MiFIR review negotiations.
Implications
Trading venues and investment firms, and data reporting service providers (DRSPs) consolidating trade reports by them, will need to update their systems to comply with the changes to trade transparency, including the changes to the reporting fields and trade flags. This may also impact on systems for transaction reporting.
Alongside these changes, both the UK and EU are addressing the lack of consolidated tapes of market data. Both jurisdictions are now looking to put place frameworks that would enable, for each asset class, a single private sector operated tape, that would be authorised and regulated.
It is clear that these changes will result in a degree of divergence between EU & UK reporting standards. The FCA believes the benefits of the increased quality and clarity of post-trade reporting will outweigh the potential costs arising from the divergence from the EU on this matter. However, firms working in both jurisdictions will need to carefully review the differences when planning implementation. Enforcement actions when firms have not correctly implemented the requirements shows the value regulators place on this reporting.
How can KPMG help?
KPMG in the UK has extensive experience supporting financial services firms on Non-Financial Regulatory Reporting (NFRR) reform and is well placed to help firms assess and implement the proposed changes. This includes advisory services such as post implementation reviews, controls and operating model reviews, assisting firms with implementation of changes to reporting requirements and providing remediation support.
Look out for our upcoming articles on EMIR Refit and data quality.
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